Foreign Exchange Rates – The Must Knows

Exchange Rates

When you are transferring money, you are basically buying another currency. For example, you may be holding sterling and need to pay a bill in USD. In other words you need to buy USD.

Whilst buying a currency may seem a little different to most purchases you make, it is in effect exactly the same. The item you want to buy has a price tag attached to it and currencies are no different.

When you want to buy a currency, such as USD, this ‘price tag’ is expressed as an exchange rate. For example 1 GBP = 1.5 USD. In layman’s terms, one dollar and fifty cents will cost you 1 GBP.

We all want to get the best exchange rate we can, much in the same way that we are all keen to get the best price for every other item we purchase. Unfortunately, seeing what you actually pay when buying another currency is not as simple as when we make other purchases.

To start to understand exchange rates we first need to look at a few of the terms that are commonly associated with the movement of money.

Exchange Rates Terminology

The mid market rate - also known as the interbank rate. This rate is not set by currency companies but by the banks themselves. It is the rate at which the banks exchange money in large amounts with each other and not normally accessible to individuals and companies.

The retail exchange rate - this can also simply be called the transfer rate. As the name suggests, this is a retail exchange rate, the rate that is charged to customers (end users such as you or I) and as you can probably further surmise, the retail rate differs greatly from the mid market / interbank rate.

Spread - a spread is the difference between the buy and sell rate. In the case of a money transfer, it would be the difference between what the bank buys a currency for and what it then sells that currency to its customer for.

The spot rate - this is the price quoted for immediate settlement on a currency transfer. It is a currency transfer that is happening now - in other words, you are agreeing to the rate now.

The spot rate - this is the price quoted for immediate settlement on a currency transfer. It is a currency transfer that is happening now - in other words, you are agreeing to the rate now.

A forward rate - this is an exchange rate of a currency transfer that will not take place until a predetermined date in the future; it is a forward-looking price.

Sell rate – this is the rate at which foreign currency is sold in exchange for local currency.

Buy rate - this is the rate at which you buy foreign currency using local currency.

Indicative rates - these are rates that are displayed or advertised that are not the actual rate you will get but an idea of what rate you may get.

What should you be looking out for?

The single most important thing to note is the mid market rate.

In a perfect world you would conduct all of your transfers at the mid market rate, as this is the same rate at which the banks transfer money between each other. This would be similar to buying a new car at exactly the same price at which the dealer bought it from the maker. Ultimately, it is impossible unless under some very unusual circumstances.

So your aim is fairly simple - you want to transfer your money as close to mid market rate as possible.

How do you get a rate close to the midmarket rate?

A lot of the time the internet is seen as the ‘go to’ resource for ensuring that you are being quoted a competitive exchange rate. You can read more about online rates here, but in short, you are more likely to see indicative rates and retail rates on websites. In other words, the opposite end of the midmarket rate with very large spreads.

Historically, you will find that banks have the highest spreads (the worst exchange rates for you the transferee). In addition, the majority of FX brokers, whether online or on a person to person basis, also tend to deal at a retail rate level.

With the advent of technology and more competition, there is now the option for you to obtain transparent charging. This means that FX brokers, such as Incompass, will tell you the exact spread you are going to pay from the midmarket rate.

It is only by dealing with FX brokers, who offer this transparency, that you will know exactly what ‘cost’ is associated with your transfer and that you are getting a competitive exchange rate.

Find out more about how Incompass can help you with transparent charging and market leading rates, coupled with excellent personal service.

Exchange Rates

When you are transferring money, you are basically buying another currency. For example, you may be holding sterling and need to pay a bill in USD. In other words you need to buy USD.

Whilst buying a currency may seem a little different to most purchases you make, it is in effect exactly the same. The item you want to buy has a price tag attached to it and currencies are no different.

When you want to buy a currency, such as USD, this ‘price tag’ is expressed as an exchange rate. For example 1 GBP = 1.5 USD. In layman’s terms, one dollar and fifty cents will cost you 1 GBP.

We all want to get the best exchange rate we can, much in the same way that we are all keen to get the best price for every other item we purchase. Unfortunately, seeing what you actually pay when buying another currency is not as simple as when we make other purchases.

To start to understand exchange rates we first need to look at a few of the terms that are commonly associated with the movement of money.

The mid market rate - also known as the interbank rate. This rate is not set by currency companies but by the banks themselves. It is the rate at which the banks exchange money in large amounts with each other and not normally accessible to individuals and companies.

The retail exchange rate - this can also simply be called the transfer rate. As the name suggests, this is a retail exchange rate, the rate that is charged to customers (end users such as you or I) and as you can probably further surmise, the retail rate differs greatly from the interbank rate.

Spread - a spread is the difference between the buy and sell rate. In the case of a money transfer, it would be the difference between what the bank buys a currency for and what it then sells that currency to its customer for.

A forward rate - this is an exchange rate of a currency transfer that will not take place until a predetermined date in the future; it is a forward-looking price.

Sell rate – this is the rate at which foreign currency is sold in exchange for local currency.

Buy rate - this is the rate at which you buy foreign currency using local currency.

Indicative rates - these are rates that are displayed or advertised that are not the actual rate you will get but an idea of what rate you may get.

What should you be looking out for?

The single most important thing to note is the midmarket rate.

In a perfect world you would conduct all of your transfers at the midmarket rate, as this is the same rate at which the banks transfer money between each other. This would be similar to buying a new car at exactly the same price at which the dealer bought it from the maker. Ultimately, it is impossible unless under some very unusual circumstances.

So your aim is fairly simple - you want to transfer your money as close to the midmarket rate as possible.

How do you get a rate close to the mid market rate?

A lot of the time the internet is seen as the ‘go to’ resource for ensuring that you are being quoted a competitive exchange rate. You can read more about online rates here, but in short, you are more likely to see indicative rates and retail rates on websites. In other words, the opposite end of the mid market rate with very large spreads.

Historically, you will find that banks have the highest spreads (the worst exchange rates for you the transferee). In addition, the majority of FX brokers, whether online or on a person to person basis, also tend to deal at a retail rate level.

With the advent of technology and more competition, there is now the option for you to obtain transparent charging. This means that FX brokers, such as Incompass, will tell you the exact spread you are going to pay from the mid market rate.

It is only by dealing with FX brokers, who offer this transparency, that you will know exactly what ‘cost’ is associated with your transfer and that you are getting a competitive exchange rate.

Find out more about how Incompass can help you with transparent charging and market leading rates, coupled with excellent personal service.